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[2018] ZASCA 137
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Commissioner for the South African Revenue Service v Digicall Solutions (Pty) Ltd (927/2017) [2018] ZASCA 137; [2018] 4 All SA 647 (SCA); 2019 (4) SA 312 (SCA); 81 SATC 97 (28 September 2018)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 927/2017
In
the matter between:
COMMISSIONER
FOR THE SOUTH
AFRICAN
REVENUE
SERVICE APPELLANT
and
DIGICALL
SOLUTIONS (PTY)
LTD RESPONDENT
Neutral
citation
:
Commissioner
for the South African Revenue Service v Digicall Solutions (Pty) Ltd
(927/2017)
[2018] ZASCA 137
(28
September 2018)
Coram
:
Navsa, Majiedt, Swain and Zondi JJA and Mokgohloa AJA
Heard
:
21 August 2018
Delivered:
28
September 2018
Summary:
Income
Tax Act 58 of 1962 – s 103(2) – taxpayer company –
successive changes in shareholding in consecutive tax
years –
sole purpose from time of first change in shareholding to preserve
and utilise assessed loss for set-off against
future income –
assessed loss carried over to next tax year – second
acquisition of shares – income thereafter
received by taxpayer
– income indirect result of first acquisition of shares –
set-off of assessed loss against income
disallowed.
Order
On
appeal from:
Western
Cape Division of the High Court, Cape Town (Cloete J with Yekiso and
Nuku JJ concurring, sitting as court of appeal):
1 The appeal succeeds
with costs, including the costs of two counsel.
2 The order of the court
a quo is set aside and replaced with the following order:
‘
(a)
The appeal succeeds with costs, including the costs of two counsel.
(b)
The order of the tax court is set aside and replaced with the
following order:
“
The appeal is
dismissed and the assessments which form the subject of this appeal
are confirmed”.’
JUDGMENT
Swain JA (Navsa,
Majiedt and Zondi JJA and Mokgohloa AJA concurring):
[1]
The
appellant, the Commissioner for the South African Revenue Service
(the Commissioner), issued additional assessments against
the
respondent, Digicall Solutions (Pty) Ltd (the taxpayer), during
November 2010 in respect of the 2005-2008 income tax periods,
disallowing the utilisation by the taxpayer of certain assessed
losses during these periods, in terms of s 103(2)(
b
)(A)(
aa
)
of the Income Tax Act 58 of 1962 (the Act).
[2]
Aggrieved
at the additional assessments, the taxpayer lodged an objection which
was dismissed by the Commissioner. The taxpayer
then successfully
appealed to the tax court which granted an order setting aside the
assessments and referred the matter back to
the Commissioner for
reassessment on the ground that the taxpayer was entitled to set-off
the assessed loss against its income
during the relevant years. The
Commissioner then appealed to the full court of the Western Cape
Division of the High Court, which
dismissed the appeal with costs on
the ground, inter alia, that the requirements of s 103(2) of the Act
were not satisfied. Special
leave to appeal was thereafter granted by
this Court.
[3]
The
relevant portions of s 103(2) of the Act read as follows:
‘
Whenever
the Commissioner is satisfied that—
(
a
)
any agreement affecting any company or trust; or
(
b
)
any
change in—
(i)
the shareholding in
any
company; or
(ii)
the members’ interests in any company which is a close
corporation; or
(iii)
the trustees or beneficiaries of any trust,
as
a
direct or indirect
result of which—
(A)
income has been received by or has accrued to that company or trust
during
any
year of assessment; or
(B)
any proceeds received by or accrued to or deemed to have been
received by or to have accrued to that company or trust in
consequence
of the disposal of any asset, as contemplated in
the Eighth Schedule, result in a capital gain during any year of
assessment,
has at
any
time been entered into or effected by
any
person
solely or mainly
for the purpose of
utilizing
any
assessed loss,
any
balance of assessed
loss,
any
capital loss or
any
assessed capital loss, as
the case may be, incurred by the company or trust, in order to avoid
liability on the part of that company
or trust or
any
other
person for the payment of
any
tax, duty or levy on income, or
to reduce the amount thereof—
(
aa
)
the set-off of
any
such assessed loss or balance of assessed
loss against
any
such income shall be disallowed. . . .’
(Emphasis added.)
[4]
In terms of
s 103(2) of the Act the Commissioner had to be 'satisfied' that three
requirements were fulfilled to justify the disallowance
of the
assessed loss, namely:
4.1 A change in the
shareholding of the taxpayer had been effected; and
4.2 The change in the
shareholding resulted directly or indirectly in income being received
by, or accruing to the taxpayer, during
any year of assessment, and;
4.3. The change in the
shareholding was a transaction concluded for the sole or main purpose
of utilising the taxpayers assessed
loss, in order to avoid liability
for the payment of tax on income.
[5]
The distinctive feature in the present case is that two changes in
the shareholding of the taxpayer occurred in successive tax
years.
The first sale of shares took place on 5 March 2003, during the
taxpayer’s 2003 year of assessment, when they were
purchased by
Selldirect Marketing (Pty) Ltd (SDM). The second, on 25 November
2003, during the taxpayer’s 2004 year of assessment,
when they
were purchased from SDM by a company called Glasfit, which thereafter
nominated Nutbridge Investments (Pty) Ltd (Nutbridge)
as the
purchaser. A portion of the consolidated assessed loss in question
was set-off against the taxpayer's income during the
2004 year of
assessment, after the shares had been acquired by Nutbridge. The
balance was thereafter set-off against the income
of the taxpayer
during the 2005-2008 income tax periods. As stated earlier, these
amounts were subsequently disallowed by the Commissioner.
The
assessment for the 2004 income tax period was not adjusted, because
this was precluded by the lapse of time in terms of s 79
of the Act,
as it then stood.
[6]
It is common cause that only the first change in shareholding is
relevant to the determination of the appeal. Prior to the
determination of the dispute before the tax court, the Commissioner
applied to amend the grounds of assessment to include the second
change in shareholding as justification for the disallowance of the
assessed loss during the 2005-2008 income tax periods. The
application was dismissed on the basis that the first change in
shareholding was foundational to the Commissioner's disallowance
of
the use of the assessed loss. It was held that the fact that the
Commissioner referred to and accepted that there had been a
further
change in shareholding did not, on a proper understanding and reading
of the letter of assessment, disclose an intention
to rely on the
further change in shareholding for this purpose.
[7]
The correct approach to the interpretation of s 103(2) of the Act,
was described in
Glen Anil Development Corporation Ltd v Secretary
for Inland Revenue
1975 (4) SA 715
(A) at 727H-728A, as follows:
‘
Sec.
103 of the Act is clearly directed at defeating tax avoidance
schemes. It does not impose a tax, nor does it relate to the
tax
imposed by the Act or to the liability therefor or to the incidence
thereof, but rather to schemes designed for the avoidance
of
liability therefor
.
It should, in my view, therefore, not be construed as a taxing
measure but rather in such a way that it will advance the remedy
provided by the section and suppress the mischief against which the
section is directed. The discretionary powers conferred upon
the
Secretary should, therefore, not be restricted unnecessarily by
interpretation.
'
(Authorities omitted and emphasis added.)
[8]
In
Conshu (Pty) Ltd v Commissioner for Inland Revenue
[1994] ZASCA 104
;
1994 (4)
SA 603
(A) at 611E-612A, it was also pointed out that the intention
'to cast the net as wide as possible' in terms of the subsection
could
be perceived when regard was had to the use of the introductory
'whenever,' and that the provision was 'replete with the indefinite
"any"', which appeared 13 times in s 103(2) of the Act, as
indicated above. In addition, in
Commissioner for Inland Revenue v
Ocean Manufacturing Ltd
[1990] ZASCA 66
;
1990 (3) SA 610
(A) at 618H it was stated
that 'any' was a word of wide and unqualified generality which may be
restricted by the subject matter
or the context, but prima facie was
unlimited, and that;
'In
regard to the subject-matter there is nothing in s 103(2) to suggest
that the word
any
was used in a limited sense.'
[9]
As regards the purpose of s 103(2), in
Conshu
at 610F-I, this
Court quoted with approval the following statement by D M Stewart
‘The Prohibition of Tax Avoidance: An Evaluation
of s 103 of
the South African Income Tax Act 58 of 1962’
(1970) 3 CILSA 168
at 189:
'The
reason for this subsection is that elsewhere in the Act (s 20) it is
recognised that to divide a taxpayer's business up into
separate
yearly compartments is largely artificial, and, as a result, where in
one year allowable deductions exceed income, the
taxpayer may carry
the balance of deductible excess forward as an "assessed loss".
This loss may be deducted from income
earned in the next or a
subsequent year. As a result, certain taxpayers, whose businesses
have failed to profit, build up large
assessed losses. When these
taxpayers are individuals the Revenue has nothing to fear for the
assessed loss is not itself transferable,
but where the taxpayer is a
company, whose shares can readily change hands, new proprietors will
attach themselves to the company
and inject new income into it in
order to exploit the assessed loss. It is this "trafficking"
in the shares of companies
with assessed losses which gave rise to
the enactment of s 103(2).'
[10]
The submissions by the taxpayer must therefore be assessed against a
construction of the subsection that
advances
the remedy it provides and suppresses the mischief against which it
is directed. The taxpayer submitted that the first
change in
shareholding could not have been effected for the sole or main
purpose of utilising the assessed loss, as there was no
income during
the taxpayer’s 2003 year of assessment, against which the
assessed loss could be offset. The purpose test had
to be applied
with reference to the person who 'effected' the 'change in the
shareholding' that resulted in income, against which
a set-off of the
assessed loss was made. According to the taxpayer this was Glasfit /
Nutbridge, the acquirer, pursuant to the
second change in
shareholding and not SDM, which did not utilise the assessed loss to
satisfy the 'purpose' requirement, because
of an absence of income by
the taxpayer during that year of assessment.
[11]
The subsection, however, expressly provides for 'the purpose of
utilising
any
assessed loss' to avoid liability ‘for the
payment of any tax’. It also expressly disallows the set-off of
'any such
assessed loss' against 'any such income'. Therefore, the
set-off of any assessed loss against any income that is received
directly
or indirectly by the taxpayer company, as a result of the
change in its shareholding, will be disallowed where the sole or main
purpose in effecting the change in its shareholding, is to avoid
liability for, or to reduce the amount of tax payable, by the
taxpayer. The purpose requirement of the subsection may accordingly
be satisfied by reference to any year of assessment in which
income
is received, whether directly or indirectly as a result of the change
in shareholding of the taxpayer company, which was
effected, whether
solely or mainly, for the prohibited purpose. I shall in any event
show that the first change in shareholding
was directed at that
ultimate purpose – utilisation of the assessed loss by the
taxpayer.
[12]
Before examining the evidence, the incidence of the onus of proof in
these proceedings must be considered.
The
provisions of s 103(4) of the Act provide as follows:
'If
in any objection and appeal proceedings relating to a decision under
subsection (2) it is proved that the . . . change in shareholding
. .
. in question would result in the avoidance or the postponement of
liability for payment of any tax . . . or in the reduction
of the
amount thereof, it shall be presumed, until the contrary is proved in
the case of any such . . . change in shareholding
. . . that it has
been entered into or effected solely or mainly for the purpose of
utilising the assessed loss, balance of assessed
loss, capital loss
or assessed capital loss in question in order to avoid or postpone
such liability or to reduce the amount thereof.'
[13]
The subsection provides that when it is proved that a change in
shareholding has occurred which results in the avoidance, or
the
postponement of liability for payment of any tax, or its reduction,
it will be presumed that the change in shareholding was
entered into,
or effected solely or mainly for the purpose of utilising the
assessed loss, in order to avoid liability for the
payment of any tax
on income. In
Glen Anil
supra at 730F, it was held that the
taxpayer therefore bore the onus in terms of the subsection, to rebut
the presumption by proving
that the change in shareholding was not
effected solely or mainly for the prohibited purpose.
[14]
The correct approach in assessing the evidence to determine whether
the taxpayer discharged this onus, was described in ITC
1185
(1972)
35 SATC 122
(N) at 123, by Miller J in the following terms:
'It
is necessary to bear in mind in that regard that the
ipse dixit
of the taxpayer as to his intent and purpose should not lightly be
regarded as decisive. It is the function of the court to determine
on
an objective review of all the relevant facts and circumstances what
the motive, purpose and intention of the taxpayer were
. . . This is
not to say that the court will give little or no weight to what the
taxpayer says his intention was, as is sometimes
contended in
argument on behalf of the Secretary in cases of this nature. The
taxpayer’s evidence under oath and that of
his witnesses must
necessarily be given full consideration and the credibility of the
witnesses must be assessed as in any other
case which comes before
the court. But direct evidence of intent and purpose must be weighed
and tested against the probabilities
and the inferences normally to
be drawn from the established facts.'
[15]
Central to a determination of the issue of whether the first change
in shareholding was effected solely or mainly for the prohibited
purpose, is an examination of the interaction between Mr Benatar, Mr
Evans, Mr Kluever and Mr Allers during the period after SDM
exercised
the option to purchase the shares on 19 September 2002, their
subsequent purchase by SDM on 5 March 2003 and their purchase
by
Glasfit from SDM on 25 November 2003. In order to place this crucial
period in context, it is necessary to briefly examine the
unsuccessful financial history of the taxpayer, before the first
acquisition of the shares in the taxpayer by SDM.
[16]
The name of the taxpayer on incorporation on 24 February 2000, was B
Clear and Simple Telecommunications South Africa (Pty)
Ltd (which
later changed its name to that of the respondent) and its sole
shareholder was an Australian company, B Digital Ltd.
The taxpayer
established a call centre facility in Cape Town, which sold MTN and
Vodacom contracts, via the call centre to customers.
A call centre,
according to Mr Benatar, who was appointed as a director of the
taxpayer in March 2000, was vital in terms of selling
contracts to
clients who did not have to come into a branch to do so. The
other director of the taxpayer was Mr Lloyd. The
taxpayer had an
assessed loss in 2001 and in December 2001 it terminated its service
provider contracts and disposed of its subscriber
bases to MTN and
Vodacom. At the beginning of 2002, B Digital Ltd wished to disinvest
from South Africa and Mr Lloyd approached
Global Capital, an
investment company, with the intent that it purchase the taxpayer to
provide services to a rival cellular provider,
namely Cell C, with
the object of making a profit.
[17]
Mr Benatar, a chartered accountant who was also a fund manager at
Global Capital, stated that the easiest way to effect the
purchase
was to sell the shares in the taxpayer, as opposed to selling the
assets. According to Mr Benatar no mention was initially
made of the
assessed loss in the taxpayer, which in the 2001 tax assessment was
reflected as R47 884 445, the sole purpose
being to acquire a
call centre to provide services to Cell C. He, however, was
constrained to agree that the assessed loss would
have appeared in
the financial statements and would have been studied during the
financial and legal due diligence exercise that
Global Capital
commissioned, in respect of the taxpayer. It was substantial and
could not be ignored.
[18]
The due diligence on the taxpayer revealed MTN had instituted
proceedings against the taxpayer. According to Mr Benatar this
meant
Global Capital could not take over the company at that stage because
of the continuing liability of an ongoing legal suit.
In addition, B
Digital wished to remain in control of the taxpayer during the
litigation. He stated that Global Capital always
wanted to buy the
shares directly in the taxpayer and once the dispute with MTN was
identified they decided to set up a new company
for this purpose. A
shelf company, Basfour 2544, was acquired and the name changed to
SDM. The shareholders were Global Capital,
Mr Lloyd, Mr Benatar, Mr
Nestadt and Mr Bloch. The directors were Mr Lloyd as the managing
director, together with Mr Nestadt and
Mr Bloch. The plan was for SDM
to acquire the assets and the employees of the taxpayer immediately
and take over the lease in respect
of the call centre. It was to be
granted an option to acquire the shares in the taxpayer, to be
exercised once the legal dispute
was resolved, to enable B Digital to
retain control during the litigation.
[19]
A written agreement was then concluded on 15 March 2002 between the
taxpayer, which at that stage was still called B Clear
and Simple
Telecommunications, and Basfour 2544 (the name at that stage of SDM)
and B Digital, in which the assets of the taxpayer
were sold to
Basfour 2544. Clause 12 provided that B Digital granted to the
purchaser an option to purchase all of the shares in
the taxpayer,
which option endured for 18 months from the date of the agreement,
the purchase price being the par value of the
shares. Clause 7
recorded that as at the completion date the taxpayer would have
ceased conducting the business.
[20]
Mr Benatar accepted that at the time the agreement was concluded, SDM
was aware of the loss of R47 884 445 in respect of the
tax year
ending 30 June 2001, which had not as yet been assessed. SDM was also
aware that in terms of s 20 of the Act any
assessed loss could
only be carried forward to a future year of assessment, where the
company in question traded. He acknowledged
that this was something,
he as a chartered accountant understood and that he knew at the time
that if B Clear and Simple Telecommunications
were to utilise this
assessed loss, the company would, as it were, have to be brought back
from the grave and start trading again
in order to utilise the
assessed loss. He was also aware at the time of the operation of s
103 of the Act.
[21]
SDM then conducted the business in Cape Town and took over the lease
from B Clear and Simple Telecommunications. However, only
once it
started, so they said, did they realise that they only needed 30 out
of the 120 seats in the call centre. The success of
the business of
SDM depended substantially on deals being given to it by Cell C to
sell contracts. However, the relationship between
Mr Lloyd and the
head of marketing at Cell C allegedly soured, with the result that
the business did not receive the deals it believed
it would.
[22]
Because the facilities in the call centre exceeded what they required
and did not justify their cost, Mr Benatar stated they
decided to
sell the call centre and lease back 30 seats in the call centre from
any purchaser. According to him this was the main
reason they decided
to sell the shares in the taxpayer, even before the shares had been
purchased by SDM. He maintained the
key strategy from the side
of SDM was to reduce costs by selling the call centre, thereby
reducing their rentals. He agreed, however,
that they could have
achieved this by just selling the assets. He also agreed by the time
they exercised the option to purchase
the shares, they already knew
they only needed 30 of the 120 seats and nothing prevented them from
looking for a buyer for the
whole of the call centre.
[23]
It is therefore clear that the taxpayer was not profitable from the
outset and reflected a staggering assessed loss for the
year of
assessment ending 30 June 2001, of R47 884 445, which they all
realised had a built-in tax advantage, with a concomitant
commercial
benefit. In December 2001 it terminated its service provider
contracts and disposed of its subscriber bases to MTN and
Vodacom,
which were its main source of business. Messrs Benatar and Lloyd
being directors of the taxpayer must have had intimate
knowledge of
the reasons for its abject failure. Nevertheless, the professed
reason for selling the shares in the taxpayer to Global
Capital was
to provide services to a rival cellular provider namely Cell C, with
the object of making a profit. No details were
furnished of any
business strategy to transform the taxpayer from an abject failure
into a profitable entity, by selling services
for Cell C in
competition with its former suppliers.
[24]
For a number of reasons it is improbable this was the true reason for
selling the shares in the taxpayer. The success of the
business
depended substantially on deals being given to the taxpayer by Cell
C, to sell contracts. According to Mr Benatar the
reason this did not
eventuate was simply because of a personal difference between Mr
Lloyd and the head of marketing at Cell C.
I find it grossly
improbable that Global Capital having carried out a due diligence
study, would have purchased the taxpayer with
the object of making a
profit by selling contracts for Cell C, without having secured a
prior commitment from Cell C to do so.
[25]
I also find it grossly improbable that Mr Benatar and Mr Lloyd, who
had intimate knowledge of the taxpayer’s lack of
success in
selling contracts for MTN and Vodacom, would have been willing to be
shareholders in SDM and acquire the business of
the taxpayer with the
sole object of making a profit, without a prior commitment from Cell
C. In addition, Mr Benatar maintained
that only once they started
operating did they realise they only needed 30 out of the 120 seats
in the call centre. Again it is
improbable that Mr Benatar with his
intimate knowledge of the history of the taxpayer, only came to this
realisation after they
restarted the business of the taxpayer.
[26]
Such ill-informed conduct is only explicable on the basis that the
purpose in acquiring the taxpayer was not to make a profit,
but to
ensure that it was trading, albeit at a loss, as at 30 June 2002. SDM
was aware of the large assessed loss of R47 884 445
which could only
be preserved and carried forward to the following tax year, if the
taxpayer traded. The acknowledgement by Mr
Benatar that if the
assessed loss was to be utilised the taxpayer would as it were, have
to be ‘brought back from the grave’
and start trading
again, reveals their true purpose.
[27]
Having ensured the taxpayer was trading as at 30 June 2002, the
assessed loss was carried forward into the 2003 tax year and
SDM then
exercised the option to purchase the shares in the taxpayer, on 19
September 2002. Mr Benatar agreed by the time SDM exercised
the
option there was nothing left in the taxpayer, except the assessed
loss. He also agreed that although their original intention
was to
acquire the shares in the taxpayer, they were not compelled to do so.
He conceded there was nothing to be gained by SDM
in acquiring the
shares, because the business was dead in the hands of the taxpayer.
However, if the taxpayer was revived and was
conducting business the
assessed loss gave it a value. These concessions together with the
fact that a decision had been taken
to sell the shares in the
taxpayer even before they had been purchased by SDM, again reveals
that their true purpose in acquiring
the shares even at this early
stage, must have been to utilise the assessed tax loss.
[28]
According to Mr Benatar, once they had decided to sell the taxpayer
and the call centre, Global Capital initiated the sale
process. Mr
Kluever was an auditor who audited the Global Capital group of
companies and Mr Benatar asked him whether he had any
clients looking
to acquire a call centre. Mr Kluever stated that he had developed a
close working relationship with Mr Benatar
and Mr Allers, a director
of Glasfit and like Mr Benatar and Mr Kluever, a chartered
accountant. Mr Benatar stated he could not
recall whether they had
advised Mr Kluever of the assessed loss in the taxpayer. However, Mr
Kluever confirmed Mr Benatar had told
him at the outset of the
assessed loss of approximately R90 million.
[29]
Mr Kluever stated he thought the call centre in Cape Town might be of
interest to Mr Allers. He contacted him and Mr Allers
indicated
Glasfit would be interested in acquiring the taxpayer. Mr Allers
stated Mr Kluever had informed him in November 2002
that the taxpayer
had made serious tax losses of approximately R90 million. The
objective of Mr Allers was to set up a business
process outsourcing
venture (the venture) for Glasfit, together with a rival company PG
Glass, which would require a call centre.
[30]
Mr Allers therefore instructed Mr Kluever to gather information to
enable an offer to be made to SDM, for the purchase of the
taxpayer.
On 4 December 2002 in a preliminary report which Mr Kluever prepared
and discussed with Mr Allers, he stated the taxpayer
had ceased
trading after year end being June 2002 and its tax assessment
reflected an assessed loss of R47 884 445.
[31]
Mr Allers confirmed that Mr Kluever had reported this to him and he
agreed that in December 2002, the board of Glasfit knew
the taxpayer
had ceased its operations and had an assessed loss. However, later in
his evidence he sought to minimise this concession
by maintaining the
board would have queried this, because they wanted a company which
was operating a call centre. The objective
fact is the taxpayer was a
dormant company with a very large tax loss and this was known by the
board of Glasfit from the outset,
when it discussed the proposed
purchase of the shares from SDM.
[32]
Mr Kluever stated as part of his due diligence study of the taxpayer,
he visited the Cape Town call centre. He concluded it
would be
suitable for the venture envisaged by Mr Allers. He conveyed his
views to Mr Allers but warned him the Commissioner could
seek to
apply s 103 of the Act to the intended acquisition by SDM of the
shares in the taxpayer and the intended sale of the call
centre back
to the taxpayer. He also warned Mr Allers there was a risk the
Commissioner may seek to prevent the carry forward of
these losses
against future income, if such income resulted directly or indirectly
from the intended change in shareholding. He
did not recommend that
Glasfit should not proceed with the transaction because of this risk,
but believed it should be taken into
account in determining the value
of the taxpayer. It is significant even at this early stage, when SDM
had not yet acquired the
shares in the taxpayer, the parties were
concerned about s 103(2) of the Act being implicated.
[33]
Mr Kluever nevertheless maintained that the main focus of the
transaction in which Glasfit sought to acquire the shares in
the
taxpayer was the potential to utilise and conduct the call centre as
a going concern, with the relevance of the assessed loss
being
minimised and with its value being relegated to a negligible factor.
He, however, warned Mr Allers that the Commissioner
might also seek
to apply s 103 of the Act to this purchase of the shares in the
taxpayer by Glasfit. His concern arose from the
magnitude of the
assessed loss and the inherent danger that any change in shareholding
where a tax loss was involved, was at risk
of being exposed to s 103
of the Act.
[34]
The involvement of Mr Kluever and Mr Allers in the initial attempts
by Glasfit to purchase the shares in the taxpayer, commencing
in
November 2002, must be examined in the context of their knowledge
that the taxpayer had a large assessed loss of approximately
R90
million and had ceased trading at the end of June 2002. It is also
significant that these negotiations commenced after SDM
had exercised
its option to purchase the shares on 19 September 2002, but before it
had purchased them on 5 March 2003.
[35]
Various calculations were then made by Mr Kluever and Mr Allers to
formulate an offer by Glasfit to purchase the shares in
the taxpayer
from SDM. That Glasfit was extremely interested in purchasing the
taxpayer, although it had not traded since the end
of June 2002, is
clear from the wide range of offers Glasfit made to SDM in the period
between November and March 2003. In all
of these offers, the largest
percentage was allocated to the value of the potential tax shield.
Offers were made of R2.2 million
with a potential tax shield valued
at R1.6 million, R4.8 million with a potential tax shield valued at
R4 million and R10.726
million with a potential tax shield
valued at R5 million. This clearly illustrates that the taxpayer’s
large assessed loss
which SDM had conveniently carried over into the
2003 tax year, must have been of paramount importance to Glasfit.
[36]
According to Mr Kluever, SDM did not accept these offers because SDM
believed they substantially undervalued the taxpayer.
Mr Allers
stated the negotiations ceased in March 2003, because no progress was
being made. However, on 27 February 2003 an email
was sent by Mr
Evans of B Digital, which recorded it was agreed that the sale of the
shares in the taxpayer to SDM was to go ahead
on the basis of the
attached agreement and Mr Lloyd was planning to bring the business
back into the taxpayer’s 'company
shell'. Mr Evans also
recorded the taxpayer would be a going concern at the time the
agreement was signed.
[37]
Mr Benatar agreed that the significance of these statements lay in
the application of s 20 of the Act, with the object of ensuring
the
assessed loss was carried over to the next tax year. That this was
their objective, was confirmed in a further email from Mr
Evans on 28
February 2003, in which he stated that the acquisition of the shares
allowed SDM the opportunity to utilise approximately
R16 million in
assessed loss. Consequently, on the eve of negotiations apparently
breaking down, steps were being taken by SDM
to ensure the
preservation of the assessed loss in the taxpayer. Mr Allers,
however, maintained it was his interest in the call
centre of the
taxpayer in Cape Town that had not gone away after negotiations
ceased in March 2003.
[38]
The formal agreement (referred to by Mr Evans in his email) in which
SDM acquired the shares in the taxpayer for a purchase
price of
R0,01, was signed on 5 March 2003. Although the shares had been
acquired the business of the taxpayer was still located
in SDM. A
further agreement was therefore concluded on 7 May 2003 between SDM
and the taxpayer, for the sale of the business back
to the taxpayer
for an amount of R1 million, being the amount paid by SDM to purchase
the business in the first place. Mr Benatar
agreed that after the
implementation of the sale of the assets, over and above any value
there was in the litigation with MTN (which
in any event would only
benefit B Digital), there was no value left in the taxpayer. The
business had come to a standstill, it
was deprived of its operating
assets, no longer had premises from which to operate its business and
there were no remaining employees.
[39]
The purpose of SDM in acquiring the shares in the taxpayer and
thereafter transferring the business back to the taxpayer, must
therefore have been to ensure the taxpayer was a going concern as at
the end of June 2003, in order to satisfy the requirements
of s 20 of
the Act. This goal having been achieved, the taxpayer again ceased
trading at the end of June 2003, in the same manner
and with the same
goal as it had ceased trading at the end of June 2002. The result was
that the assessed loss in the taxpayer
was not only preserved by SDM,
but was increased whilst under its control during the period 5 March
2003 to 30 September 2003,
by R21 115 220.
[40]
Of significance in this regard is that in March 2003 Mr Allers had no
commitment from PG Glass to participate in the venture,
although
Glasfit and PG Glass had been in discussions for a long time.
Consequently, a purchase by Glasfit of the shares in the
taxpayer in
March 2003 would have been premature and may have exposed Glasfit to
proceeding on its own, when it was clear the participation
of PG
Glass was essential for the success of the venture. The relevant role
players were all posturing with the objective of the
utilisation of
the assessed loss by the taxpayer.
[41]
The negotiations between Glasfit and PG Glass continued and resulted
in a memorandum of understanding being concluded between
them on 3
September 2003, which provided for the venture. Both parties
contemplated the formation of a new company and the establishment
of
a consolidated call centre from which the venture would be conducted,
owned by the new company and operated from new premises.
[42]
Mr Allers and Mr Kluever maintained that because the memorandum of
understanding required a new company to be structured, this
was the
reason for their decision in September 2003 that discussions with SDM
should be revived. The more probable reason was the
commitment of PG
Glass had been secured and the taxpayer with its large assessed loss
was needed to house the venture. The reason
for this conclusion is
found in the evidence of Mr Kluever that the venture between Glasfit
and PG Glass was an extremely ambitious
undertaking, with great
strategic and execution risk to Glasfit, which held the promise of
significant profit if it could be completed
successfully. It was a
challenging and difficult project to complete and the participation
of PG Glass was essential to its success.
The large assessed loss
would inevitably be a valuable safety net for the venture in the
crucial early stages of its development,
by the immunisation of any
profits from tax when its success would be particularly vulnerable.
[43]
Of particular significance is the fact that there was no evidence
that SDM negotiated with any other parties for the sale of
the shares
in the taxpayer after the negotiations allegedly broke down, until
they were resumed with Glasfit in November 2003.
It is improbable
that SDM would not have attempted to sell the taxpayer in the
interim, if the negotiations with Glasfit had genuinely
broken down.
On the contrary, the conduct of SDM during this period was directed
at preserving the assessed loss, by ensuring it
was carried over to
the following tax year. On the probabilities, the object in
maintaining that negotiations had broken down must
have been to
prevent an inference being drawn that the conduct of SDM in
preserving the assessed loss was to benefit Glasfit. This
conclusion
is supported by the improbability of Mr Allers being prepared to lose
the opportunity of utilising the large assessed
loss in the taxpayer,
by allowing the negotiations to fail. Significantly, shortly after
the negotiations were allegedly resumed
in September 2003, agreement
was reached between SDM and Glasfit for the sale of the shares in the
taxpayer at a vastly reduced
purchase price.
[44]
The oft repeated evidence of Mr Allers and Mr Kluever that the
purpose in buying the shares in the taxpayer was the acquisition
of
the Cape Town call centre, and not the opportunity to utilise the
assessed loss to avoid liability for the payment of tax, is
grossly
improbable for several reasons. The first is that it is clear from
the minutes of the steering committee set up by Glasfit
to manage the
venture, that at no stage was the possibility of the consolidated
call centre being located in Cape Town discussed.
The attempt by Mr
Allers and Mr De Clercq to suggest otherwise was disingenuous.
[45]
The second reason is that Mr Allers agreed that in the memorandum of
understanding the idea was to initially move the two separate
call
centres of Glasfit and PG Glass into one entity, in one location,
which would have included staff who were all based in Johannesburg.
He agreed that at the beginning of September 2003 the idea would have
been to create the new premises in Johannesburg. This would
be
consistent with his concession that the views of PG Glass weighed
heavily as to where the premises of the consolidated call
centre
would be located. In fact the view of PG Glass in this regard was
recorded, albeit indirectly, in the minutes of the steering
committee
on 13 October 2003. PG Glass stated it was concerned about the
distance and traffic problems for PG Glass staff, if Bryanston
was to
be the location of its new premises. It is therefore self-evident
that PG Glass would never have agreed to the consolidated
call centre
being located in Cape Town and Mr Allers must have known this.
[46]
The third reason is that the facilities at the Cape Town call centre
were not suitable for the venture envisaged by Mr Allers.
Although Mr
Kluever maintained that after visiting the Cape Town call centre at
an early stage of his due diligence study of the
taxpayer he
concluded the call centre would be suitable for the venture, it was
only on 19 November 2003 that it was ascertained
that the computers
at the Cape Town call centre did not have the required specifications
and could not be used. In short, much
of the existing equipment was
technically obsolete. If the main focus from the outset was to
acquire the Cape Town call centre
for the venture, it is improbable
this would only have been properly investigated and discovered at
such a late stage.
[47]
As pointed out above, shortly after the negotiations were allegedly
resumed between SDM and Glasfit, SDM offered the sale of
the shares
in the taxpayer to Glasfit for R3.68 million which was accepted on 3
October 2003 and the sale agreement was concluded
on 25 November
2003. There was no evidence that during these negotiations any other
offers were made and rejected, despite SDM
rejecting the previous
offer of R10 726 000 made on 14 January 2003 because SDM
believed the offer substantially undervalued
the taxpayer. In the
light of the evidence of Mr Benatar that the value of the assets in
the taxpayer were substantially higher
than the purchase price, and
the evidence of Mr Kluever that he regarded the sale price as a
bargain, extensive negotiations must
have preceded the conclusion of
this agreement. The absence of any evidence on this issue, fortifies
the conclusion that it is
improbable the negotiations broke down in
March 2003.
[48]
The repeated attempts by Mr Allers and Mr Kluever to diminish the
importance of the tax loss in the taxpayer, by steadfastly
maintaining the assessed loss only affected the value to be offered
for the taxpayer, were not only disingenuous, but were also
cogent
evidence of what their real purpose was in acquiring the shares in
the taxpayer. Mr Kluever went so far as to claim there
was
essentially zero value in the assessed loss, but it was ‘possible’
it could be set-off against some future income.
This statement was
inconsistent with the concession made by Mr Allers, that the larger
percentage of the offers made by Glasfit
were allocated to the
potential tax shield. It was also inconsistent with the evidence that
prior to the approval of the sale by
the board of Glasfit, Mr Kluever
had advised the board that the taxpayer had an estimated tax loss of
R100 million, which could
provide a temporary tax shield for the
business. In addition, Mr Kluever had on 27 October 2003 requested
the annual financial
statements for the taxpayer for the year ended
30 June 2003, in which the assessed loss was quantified. Mr Benatar
agreed the production
of these financial statements paved the way for
the conclusion of the agreement, because they reflected what the
accounting loss
was.
[49]
The justifiable concern of Mr Kluever that the Commissioner may seek
to apply s 103 of the Act to the intended acquisition
by SDM of the
shares in the taxpayer, as well as any subsequent acquisition by
Glasfit of these shares from SDM, did not, however,
result in Glasfit
being advised by him not to proceed with the transaction, despite the
risk. Simply put, the huge benefit to Glasfit
in utilising the loss
in the taxpayer to avoid liability for the payment of tax, made the
risk worthwhile.
[50]
An objective review of all the relevant facts and circumstances is
required in order to determine the motive, purpose and intention
of
SDM in acquiring the shares in the taxpayer. The direct evidence of
Mr Benatar that the purpose of SDM in purchasing the shares
in the
taxpayer, was to provide services to the cellular provider Cell C
with the object of making a profit, falls to be rejected
when weighed
and tested against the probabilities and inferences to be drawn from
the established facts, set out above. For the
same reasons the
evidence of Mr Allers and Mr Kluever that the purpose of Glasfit in
purchasing the shares in taxpayer, was to
acquire the Cape Town call
centre for the venture, also falls to be rejected. In both the first
and second acquisition of the shares
in the taxpayer, the sole or at
the very least the main purpose of SDM and Glasfit respectively in
purchasing the shares, was to
utilise the assessed loss by setting it
off against income to be received by the taxpayer in the ensuing tax
years, in order to
avoid liability for the payment of tax on such
income. Mr Benatar, Mr Lloyd, Mr Kluever and Mr Allers were
intimately involved
in all the dealings from inception. All the
related transactions were structured so as to enable the utilisation
of the assessed
loss ultimately by Glasfit or its nominee.
[51]
The taxpayer therefore failed to discharge the onus of proving that
the first change in shareholding when SDM purchased the
shares in the
taxpayer, was not effected solely or mainly for this prohibited
purpose. The court a quo accordingly erred in directing
its attention
to the second acquisition of the shares in the taxpayer by Glasfit,
in order to determine whether the purpose requirement
of s 103(2) of
the Act, had been satisfied.
[52]
I turn to consider the further requirement of s 103(2) of the Act,
namely whether the first change in shareholding
in the
taxpayer when SDM acquired the shares, had the direct or indirect
result that income was received by, or accrued to the
taxpayer,
during any year of assessment.
[53]
The taxpayer submitted that the income that was received by the
taxpayer after the second change in shareholding when Glasfit
purchased the shares in the taxpayer from SDM, was beyond the reach
of s 103(2) of the Act, because this income did not result
directly
or indirectly from the first change in shareholding. The income
against which the assessed loss was set-off by the
taxpayer in the
2004 to 2008 tax years, resulted directly or indirectly from the
second change in shareholding, upon which the
Commissioner could not
rely. The Commissioner’s response was that if this was so,
taxpayer companies could simply artificially
effect more than one
change in shareholding to circumvent the provisions of s 103(2) of
the Act. It was submitted that to permit
this would be contrary to
the principle that the subsection should be considered in a manner
that advances the remedy and suppresses
'trafficking' in shares of
companies, with assessed losses.
[54]
The tax court and the court a quo concluded that the first change in
shareholding did not directly or indirectly result in
income being
received by, or accruing to the taxpayer. The tax court reasoned that
the income was derived not from the first change
in shareholding, but
from a later intervening event, being the second change in
shareholding and the income was not contemplated
at the time when SDM
acquired the shares. It noted that the breaking of the chain of
causation was referred to in delictual cases
as a
nova causa
interveniens
. Accordingly, so it reasoned, the income was not the
'result' of the first change in shareholding. The court a quo was
even more
explicit in its reliance upon the delictual test of
causation, concluding that although the first change in shareholding
may have
been the
sine qua non
of the receipt of income by the
taxpayer, it was not the
causa causans
. It was the second
change in shareholding that was the effective cause.
[55]
In
Tuck v Commissioner for Inland Revenue
1988 (3) SA 819
(A)
at 833B, Corbett JA stated that:
'I
am not sure that it is appropriate to apply the principles of
causation, as developed particularly in the criminal law and the
delictual field, when considering the problem as to how, from the
income tax point of view, a taxpayer’s receipt should be
characterised, ie whether as income or as capital.'
Although
the reservation was expressed in a different factual context it is
equally applicable on the facts of the present case.
[56]
The subsection provides that the change in shareholding must result,
directly or indirectly, in income being received by, or
accruing to
the taxpayer, during
any
year of assessment. It is therefore
clear that the direct or indirect receipt of income by the taxpayer,
does not have to occur
in the same tax year as the change in
shareholding of the taxpayer. It may occur in any year of assessment,
provided it results
directly or indirectly from the change in
shareholding.
[57]
In ITC 1123
(1968) 31 SATC 48
(T), it was held whether income has
been received by, or accrued to a company 'as a direct or indirect
result' of the change in
shareholding, is a question of fact.
Consequently, whether the second change in shareholding precludes a
finding that the income
received by the taxpayer resulted directly or
indirectly from the first change in shareholding, is an issue of fact
which will
have to be resolved on a consideration of the evidence.
[58]
As pointed out in
Conshu
supra at 610G-I, the subsection was
enacted to prevent such 'trafficking' in the form of new
proprietors attaching
themselves to the company and injecting new
income into it, in order to exploit the assessed loss. In my view,
the second change
in shareholding would preclude a finding that the
income in question resulted directly from the first change in
shareholding. It
would not, however, preclude a finding that the
income resulted indirectly from the first change in shareholding. The
conclusion
that SDM purchased the shares in the taxpayer with the
sole, or at the very least, the main purpose, of utilising the
assessed
loss to avoid liability on the part of the taxpayer for the
payment of tax in the following tax years, must have had as its
objective,
the enablement of Glasfit to utilise the assessed loss for
the same prohibited purpose. On the unique facts of this case, it
would
be artificial to ignore this objective when determining whether
this income received by the taxpayer, resulted indirectly from the
first change in shareholding.
[59]
As pointed out by the Commissioner, the extent to which Glasfit was
able to ‘attach’ itself to the taxpayer and
‘inject'
income from the venture located in the consolidated call centre into
the taxpayer, which would otherwise have been
earned by and taxed in
the hands of Glasfit, is graphically illustrated by the following
table. In addition, it shows that the
Cape Town call centre after the
second acquisition of shares in the taxpayer by Glasfit, made a loss
in the 2004 and 2006 years
and in the remaining years only
contributed a small part of the taxable income.
1
2
3
4
5
6
7
YEAR END
TAXABLE INCOME/(LOSS) GAUTENG &
CAPE TOWN
GAUTENG PORTION
CAPE TOWN PORTION
ASSESSED LOSS BROUGHT FORWARD
TAXABLE INCOME UTILISING
ASSESSED LOSS
TAX PAID
2003 SDM
(18,242,495)
(18,242,495)
67 208 019
0
0
2004 Glasfit group
11,733,145
12 608 893
(875 748)
85 450 514
0
0
2005
15,207,187
13 883 028
1 324 159
73 717 369
0
0
2006
16,022,433
17 302 774
(1 280 341)
58 510 182
0
0
2007
27,723,657
27 538 720
184 937
42 487 749
0
0
2008
28,570,709
27 334 773
1 235 936
14 764 092
13 806 617
3 865 852
Total
99 257 131
98 668 188
588 943
13 806 617
1
2
3
4
5
6
7
YEAR END
TAXABLE INCOME/(LOSS) GAUTENG &
CAPE TOWN
GAUTENG PORTION
CAPE TOWN PORTION
ASSESSED LOSS BROUGHT FORWARD
TAXABLE INCOME UTILISING
ASSESSED LOSS
TAX PAID
2003 SDM
(18,242,495)
(18,242,495)
67 208 019
0
0
2004 Glasfit group
11,733,145
12 608 893
(875 748)
85 450 514
0
0
2005
15,207,187
13 883 028
1 324 159
73 717 369
0
0
2006
16,022,433
17 302 774
(1 280 341)
58 510 182
0
0
2007
27,723,657
27 538 720
184 937
42 487 749
0
0
2008
28,570,709
27 334 773
1 235 936
14 764 092
13 806 617
3 865 852
Total
99 257 131
98 668 188
588 943
13 806 617
[60]
Column 3 shows that by 'attaching' itself to the taxpayer, Glasfit
'injected' a total sum of R98 668 188 into the taxpayer
from 2004 to
2008, enabling it to utilise the existing R85 450 514 assessed loss
in the taxpayer when Glasfit acquired the shares
in the 2004 tax
year. Column 4 shows that during the period 2004-2008, the Cape Town
call centre only generated R588 943 taxable
income.
[61]
The first change in shareholding therefore resulted indirectly in
income being received by or accruing to the taxpayer during
the 2005
to 2008 years of assessment. The Commissioner was accordingly correct
in concluding that the provisions of s 103(2) of
the Act were
satisfied and in disallowing the taxpayer’s claim to set-off
the assessed loss against such income, during these
years of
assessment. The appeal therefore succeeds.
[62]
The following order is granted:
1 The appeal succeeds
with costs, including the costs of two counsel.
2 The order of the court
a quo is set aside and replaced with the following order:
‘
(a)
The appeal succeeds with costs, including the costs of two counsel.
(b)
The order of the tax court is set aside and replaced with the
following order:
“
The appeal is
dismissed and the assessments which form the subject of this appeal
are confirmed”.’
K G B Swain
Judge of Appeal
Appearances:
For
the Appellant: R F van Rooyen SC (with H Cassim)
Instructed by:
State
Attorney, Cape Town
State
Attorney, Bloemfontein
For
the Respondent: T S Emslie SC (with M Blumberg)
Instructed by:
Shepstone & Wylie,
Weirda Valley
Webbers
Attorneys, Bloemfontein